I have a friend who set up a 72T withdrawal account to make five substantially equal withdrawals within 5 years from his IRA since he needed the money and was not yet 59 1/2. He is desperately trying to avoid a tax penalty here for early withdrawal from his IRA if he violates the 72T rules. He is paying taxes on these withdrawals so that is not the problem.

I hope I can ask this question clearly. He made his first withdrawal at the end of the calendar year in November of 2004. He received his 2nd withdrawal in January of 2005, 3rd in January of 2006, 4th in January of 2007, and will receive the 5th in January of 2008.

Can he consider the 72T arrangement satisfied in January of 2008? He will be 60 by then and wants to start taking regular withdrawals from his IRA without tax penalty at that time. Or must he wait until November of 2009 which would be 5 calendar years from when he received the first payment?

His investment company first said he could consider the 5th payment the end of the 72T. Then they came back and said that "technically" he had to wait until November of 2009. Then they came back and said that other people have terminated the 72T at the end of the 5 year period and IRS hasn't had a problem with it.

He's trying to be cautious because it could cost him over $10,000 if he makes a mistake. I tried to research the tax code for him but that was a bust.

Any help would be greatly appreciated.

I STRONGLY recommend that he consult with a CPA about the 72T. This is a very technical analysis of tax law which should not be broached on a general tax advice forum like this one.

I very much appreciate your suggestion. He's going to probably take the conservative approach and wait 5 years from the date of the first withdrawal, which is sad since he will not be able to move out of a really bad place in which he is renting. I don't think he can afford a CPA which is why I was trying to help him. Maybe the best help I could give is to pay for the CPA.

I contacted a friend who works for the IRS and I think he used to do Estate and Gift Tax planning.

I knew this was really complicated but hoped to just get a few opinons on the matter.

Okay, in my OPINION (no research done), the 72T arrangement is satisfied in January 2008.

However, to reiterate, a CPA should be engaged to do the requisite research to be SURE!

My understanding is as follows:

If you meet the 5 years, the 10% penalty will not be imposed at all.

If you meet the 59 1/2 years but have not met the full 5 years, the penalty will be imposed on the years prior to you turning 59 1/2 but not on the years after you meet the 59 1/2 age limit. So if you turn 59 1/2 in the 4th year, years 1,2 and 3 still are affected by the penalty.

This is general information. I'd have to do more research to give a firm answer but I would charge for that.

All the best with it. Hopefully it gives you a starting point.

Thanks! This would knock off one year of the penalty which is better than nothing.

I yield to TTE's greater expertise on this matter, though I believe a referral to the CPA is still warranted.